Radware Ltd.
Q3 2015 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Good morning and welcome to Radware’s Third Quarter 2015 Results Conference Call. I would like to introduce Radware’s Chief Financial Officer, Mr. Doron Abramovitch. Please go ahead sir.

[Doron Abramovitch:]

Thank you operator and good morning, everyone. Joining me today is Roy Zisapel, Radware’s President and CEO. A copy of today’s press release is available on our website. During today’s call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to cautious you that such statements are just predictions and we undertake no obligations to update these predictions. Actual events or results may differ materially, including, but are not limited to general business conditions and our ability to address changes in our industry, changes in demand for products, the timing and amount of orders and other risks detailed from time-to-time in Radware’s filings. We refer you to the documents the company files from time-to-time with SEC, specifically the company's last Form 20-F filed on April 27, 2015. And now I will hand the call over to Roy Zisapel.

[Roy Zisapel:]

Thanks, Doron. We are obviously disappointed with our performance in the third quarter. Over the last several weeks we have carefully analyzed our results and the trends going forward. As we previously shared with you, the weakness in the quarter came mainly from the U.S. carrier and service provider market. Several large deal, specifically six deals, each one over $1 million, that we expected to be booked at the end of the quarter, did not come through. Since then, we have already booked two of these deals and we still expect to close some of those remaining deals this quarter. Despite slipping deals, we continue to see strong business potential in new account wins in the carrier and service providers segment. For example, in the third quarter, we announced that Online Tech, a leading enterprise cloud and collaboration hosting service company is selected Radware’s Attack Mitigation System to help protect their datacenters from network security threats while still maintaining business continuity. Overall, our book-to-bill ratio was strong with booking coming in at 54 million. The mix between support and subscription sales to product sales was weighted much heavier than we were used to towards subscription and service contract. These sales are obviously recognized over the life of the contract and contribute to growth in our deferred revenues. We believe that this trend will continue and the bigger portion of our orders will come from cloud and product subscriptions and services. We are offering today a broad set of cloud services, including our DDoS hybrid could mitigation service, our always-on web application firewall security service and our FastView cloud acceleration service. Our DefensePipe DDoS mitigation cloud service is comprised of our [DefensePro-TSize] installed on the customer’s premise and our global footprint of cloud scrubbing centers. The on-premise device detects attacks and mitigates them in real time. This and when the attack becomes a volumetric attack that supersedes the datacenter Internet part, the customer traffic is automatically diverted to our cloud scrubbing datacenter where the attack is cleaned and the legitimate traffic is forwarded back to the customer’s datacenter. This solution offers the broadest and most advantage for them for the attack detection, coupled with real time mitigation in the datacenter and in the cloud in a fully automated manner. Our web application firewall could service provides always-on web application firewall datacenter IPS and DDoS prevention service and target customers that are either completely operating from cloud datacenters or ones that are interested in complete security as a service offering. In addition, we offer customers our Emergency Response Team premium managed service. With the shortage of security resources on our customer’s end and the lack of expertise in protecting against cyber attacks, the ERT premium service provides our customers with a fully managed attack mitigation service for their on-premise and in the cloud and hosting solution. It provides for the complete outsourcing of monitoring, management and mitigation of cyber attack from customer data centers. Overall, we see more transactions where customers are consuming our product and solutions, either completely as a service or where cloud subscriptions and managed services are a bigger portion of the deals. While in the short-term, it has a negative impact on revenues versus a straight product purchase, we see the strong growth in cloud and product subscriptions as a strong positive for the business. It provides for larger deal sizes, more strategic positioning within our customers’ IT organizations, and strong potential for renewable revenue streams and enhancements. I would like Doron to elaborate more on the financials.

[Doron Abramovitch:]

Thank you, Roy. Let me start with the financial results for the third quarter. Revenues for the third quarter were $48.1 million, below our expectations and representing a year-over-year decline. Service revenues and recently growing cloud subscriptions are an important part of our business model. In our next call, we will share with you recent trends. Looking at the breakdown by geographies. Americas accounted for 40% of total revenue in this quarter, EMEA 27% of total revenues and APAC 33% of total revenues this quarter. Enterprise revenues contributed 76% of total revenues and carrier 24%. In our press release and in our supplemental financial data accompanying our results, you will find a GAAP to non-GAAP reconciliation of $0.09 difference in EPS. My comments in the quarter will be focused on the non-GAAP results. The main differences between the GAAP and non-GAAP results for the quarter are attributed to stock based compensation expenses, exchange rate differences, IP litigation costs and amortization of intangible assets. We continue to keep our high gross margin which remains at approximately 83%. Our operating expenses in Q3 were $36.7 million, similar to our expectations. The lower than expected revenues had a negative impact on our operating profit and profitability. The net income this quarter was $4.8 million or $0.10 per share diluted compared to net income of $11.2 million or $0.24 per share diluted in the third quarter of 2014. Weighted average number of shares complete and diluted net earnings per share for the third quarter was approximately 46.6 million shares. Turning to the balance sheet. In the third quarter and according to the plan approved by the Board we repurchased over 1.2 million of our common shares for a total of approximately $25 million. As of September 30, 2015, we had approximately $310 million in cash and financial investments. Given our strong cash position and positive outlook for continued cash generation, in Q4 ’15 and in 2016, we plan to continue executing share buyback plan. Our deferred revenues including the amount of invoice to customers for home revenues has not yet been recognized, increased 13% year-over-year. As previously mentioned, as we move more and more into the cloud and product subscriptions and service as a business model, we expect this trend and increase to continue. We ended the quarter with 981 employees, an increase of 24 from prior quarter. Moving on to our outlook for the fourth quarter. We continue to remain focused on optimizing our business model to support the growth. We will continue to add resources, mainly field sales and services teams. As Roy mentioned, we entered the fourth quarter with solid indicators to our key driver, and our year-over-year booking should be better representing our product offering, our strong position in service and growth in the subscriptions. Our revenues guidance for the fourth quarter are $54 million to $56 million, gross margin is expected to be approximately 83% and non-GAAP EPS guidance is $0.15 to $18 per share. Roy, please.

[Roy Zisapel:]

As Doron mentioned, although our revenues guidance reflect revenues decline, our business is still strong and we expect 2015 bookings to be higher than 2014 bookings with a strong growth in deferred revenues. We are very excited by the opportunities ahead of us, especially in the cyber security space. We provide the best attack mitigation solution in the market with a complete datacenter and cloud solution. We have the strongest market adoption by leading security [indiscernible] such Cisco and Check Point, the cloud security providers such as Akamai and Level 3 and large enterprise accounts for our solution. We continue to see strong market validation of the strength of our technology and product offering from independent tests, industry analysts and customer feedback. For example this month, Gartner noted Radware as a leader in the Magic Quadrant for the application delivery control and market for the sixth time. Looking forward we will execute our strategy with the following key points. First, we are very focused on providing a comprehensive integrated solution for datacenter application delivery and security. Second, we lead innovation in the market as it relates to datacenter attack mitigation, secure hybrid cloud and SDN and [NAV] application for secure networking. Third, we increased our market footprint through additional channels, OEMs, cloud and CDN channels and acquisitions. To summarize, although we are disappointed with our financial results, we feel very good about the current momentum we have in our business, about the strong customer loyalty reflected in increasing annuity bookings and about our leading technology and solution set. We have a strong financial standing with continued strong positive cash flow and we are starting to build a cloud and product subscription revenue stream mixed with additional product and service contract revenues streams. With that, I would like to open the discussion for Q&A.

[Operator:]

Thank you. [Operator Instructions]. The first is from the line of Mike Kim, Imperial Capital. Please go ahead.

[Mike Kim:]

Turning back to some of the delayed large transactions. You commented in your prepared remarks about expectations for closing. What’s your visibility around the remainder of the deals, win rates and pricing?

[Roy Zisapel:]

So I think we have pretty visibility. I don’t think the -- I think the win rate is not dependent on competition but more on some of our customers’ budget cycle. As I said we do believe we will close more and more of these and beyond the two that are already closed. So I think we are progressing well, some -- had some budget issues in the segment, in the cloud hosting service provider. But overall, we are working to close them.

[Mike Kim:]

And then when we think about the cloud services, is there an attach rate that you can describe on the number of cloud services and pricing around that?

[Roy Zisapel:]

I cannot speak on a touch rate but as I discussed we are seeing more and more deals that are cloud service or a managed service in start of the deal, especially in the security side of our business. And regarding pricing, pricing varies according to the level of service and the type of cloud service that user subscribe to. So generally speaking the web application spyware cloud ranges between 20,000 to 50,000 a year and DDoS cloud service can go anywhere from 50,000 to 500,000 a year. So it’s pretty big spectrum and in our terms it’s quite significant number, especially if you think about the DDoS cloud services.

[Mike Kim:]

Okay. And then lastly, you talked about expansion of the field sales organization. Where do you expect to focus some of your resources either by geo or vertical?

[Roy Zisapel:]

So in general we are going to invest in all three geos, inside each geo we have specific, I would say, markets and segments we are focusing depends on where we see the biggest opportunity. But overall, given our view that the market is strong, our view that our solutions are extremely competitive. And as I shared many indications for leadership, we think we need to increase our firepower in the market. And that’s why we’re adding more field sales teams and for the cloud services, given the growth in subscription and customers activity also in a service teams for the cloud business. So those are going to be our two main investments going forward.

[Operator:]

Thank you. Next question is queue is from the line of Mark Sue, RBC Markets. Please go ahead.

[Spencer Green:]

This is Spencer for Mark Sue. First just a quick housekeeping question, maybe I missed it. Can you let us know what cash flow for the quarter was?

[Roy Zisapel:]

The cash was a bit negative mainly due to some co-payments that we did automatically $2 million minus.

[Spencer Green:]

And then when we’re looking at these deal push-outs generally, are the size of the deals approximately similar type customers, or do they vary greatly?

[Roy Zisapel:]

They don’t vary greatly. As I said, the smallest point is $1 million. The segment is primarily the U.S. carry and service provider, so it’s quite focused on that market.

[Spencer Green:]

And then finally in the other regions can you just talk a little bit about what you’ve seen in Europe? It seem like APAC year-over-year was a little bit soft again. And if there’s some headwinds near term there, or is there any particular step that you’re taking focused on those regions outside the U.S.? Thank you.

[Roy Zisapel:]

I think those two phenomena in the last quarter. One was the U.S. weakness in the service provider and second is the fact that we’re booking more subscription and services with the relative weight for changing in our business. So if I am looking at booking, the international business was okay. There’s some impact for the deferred revenues, et cetera, that you’re seeing in the actual revenues, but the booking trends were relatively stable and the key issue came from the U.S., if I am looking on other region comparison. Going forward, we believe that international markets are improving and we think APAC can grow, and have good momentum currently.

[Operator:]

And our next question is from the line of Alex Henderson, Needham. Please go ahead.

[Alex Henderson:]

Roy, I am struggling with your explanation here a little bit. The third quarter of last year was $56.8 million in revenues. You had bookings which include your subscription orders which are generally overstating bookings a little bit. But if they have multiple periods in them in terms of deliveries, it’s actually less than what you reported as revenues in the year ago period. So, if the subscription business was causing the cannibalization that would obviously result in a decline in numbers that was more significant than that. So the question really is how are you confident that in fact this is just a function of the shift to subscription when you’re talking about solid conditions and improving conditions internationally? And then if you look at the guidance for the fourth quarter, it’s down substantially year-over-year again. And for the full year, you’re now down. So I am struggling a little bit with your explanation little bit here. I mean certainly push-outs from the third quarter into the fourth quarter should theoretically help you see a rebound in 4Q. And you really haven’t delineated how you fixed the problems that you expressed in the second quarter on the APAC business. So you can hit some of those issues, what gives you the confidence? And then finally just one last point, obviously the Cisco deal was a big deal potentially, that’s obviously not in the numbers yet. Can you talk a little bit about how that might manifest itself in the forward year?

[Roy Zisapel:]

Yes. So first regarding your first question. And what we are seeing and I think we tried to share it in the prepared comments is that the growth in deferred that we expect for this year is very substantial. And when we look on bookings, what we expect for this year versus last year, we do see growth. We also projected quite significant increase in the deferred revenues, also in the fourth quarter. While the revenue yield there is in a decline, we believe bookings for Q4 will be at a much higher level than the Q4 last year. So when we are looking at our booking trends, we see a very good momentum coming into Q4 and that reflects also in our confidence level about the business and the underlying trends.

[Alex Henderson:]

Isn’t your booking in Q3 below your reported revenues in Q3 of last year, how is that a good trajectory?

[Roy Zisapel:]

So in Q3 absolutely we had an issue and we said we are attributing this to the push out of the deals. But if I am taking Q3 and Q4 even together, we still believe that there is a positive booking trend by the end of the year. And takes into account of course the push out deals. So the way we look on it, Q3 was a bad quarter, no question about it. However, the booking trends, when we look for the full year and when we look for the second half in comparison to the last year, we should be both positive.

[Alex Henderson:]

So do you consider yourself still a 10% plus growth company and is that off of this depressed base, I mean that we should be able to write in pretty easily for next year or is this a company that is now in a transition period for an extended period of time as it’s just away delivers its product and services to customers?

[Roy Zisapel:]

So in terms of bookings, we definitely look on that as we should be at the double-digit growth area. In terms of revenues, we are in the shift right now as you see in Q3 and beyond the delaying deals in our guidance in Q4. So we are in a bit of shift in terms of the ways of the model. However, those should come back into the revenue already next year. So we do have now more deals that are being deferred given the cloud supply subscription and the service components in that. However, the underlying booking we still them as a double-digit growth area.

[Alex Henderson:]

And the fixing of the problems in the [pack room] that were identified as the cause for the 2Q miss?

[Roy Zisapel:]

They continue, I don’t think we are over there. We said also that it was data 69 months, and so we are progressing. I don’t want to speak specifically that if we have a good result in Q4 we are out of the gate. But currently we do expect a strong performance on that region in the coming --in this quarter. But it’s still a process. I don’t have any change there to report, either negative or positive.

[Alex Henderson:]

And the Cisco piece was the last one?

[Roy Zisapel:]

Yes. Regarding Cisco, they are preparing their launch and we are obviously tied to their launch schedule. We continue to work with them both on the product side as well as training and the ramp up of the marketing material. At this point we believe it’s going to be a Q1 launch and we are thinking now the product line there is going to be expensive and supply us with very good revenue stream on licenses as well as services.

[Alex Henderson:]

Good, thanks.

[Operator:]

Our next question is from the line of Jess Lubert, Wells Fargo. Please go ahead.

[Mike Kerlan:]

Hey, guys. This is Mike Kerlan for Jess. Hey, Rou and Doron, just a few couple of housekeeping ones. First, for Q4, I didn’t catch it, what is the OpEx guidance or how should we be modeling OpEx? And also for tax rate, it looks like the tax rate dip a little bit in Q3. How should we’d be thinking about the tax rate for Q4?

[Doron Abramovitch:]

Basically the tax expenses are recorded based on our GAAP results, so this is the reason why you’re seeing Q3 some numbers that you’re not familiar. But we are now in the current trends expected to stay in the low 20s, in the GAAP basis. And as for your model, you can take 60%-70%, out of the non-GAAP tax rate for Q4 for the whole year. As for the guidance for the first quarter regarding the OpEx, you can take for the model approximately $38.5 million to $39.5 million in line with the growth. And specially with building the phenomena that Roy mentioned. So these are the numbers that you can take for the model.

[Mike Kerlan:]

And then just as far as how feasibility in Q4, and just your forecasting methodology, have you made any, just standards to the approach versus the prior quarter as you’re assuming from a close rate to the pipeline, have you made any changes, your views regarding the macro-environment. Just in general what’s the level of conservatism baked in to the forecast?

[Roy Zisapel:]

We definitely increased our conservative measures and we did apply higher than what we used to ratio of this cloud and subscription based on our Q3 and what we believe can happen in Q4. And, as I said, we do expect higher booking result while we’re still targeting or providing guidance for our lower revenue. So it means that deferred revenue should grow substantially in the fourth quarter. And it’s a combination of maybe being a bit more conservative, but mainly due to our view of the proportion between cloud subscriptions and product sales.

[Mike Kerlan:]

And just on the deferred revenue point, on the balance sheet you guys locked it together with other items. Can you provide what deferred revenue is and if it’s a sequentially [evolves] year-over-year?

[Doron Abramovitch:]

We cannot provide right now the numbers, because you have it all in the balance sheet. However, due to the accounting principles we do not recognize revenues and neither book to our balance sheet invoice services contract, which we didn’t collect. So, the number that we talk about, what we call the deferred revenues is not what you see in the balance sheet. And one can consider it as a pipeline, and this is what we are focusing on.

[Mike Kerlan:]

So the pipelines up year-over-year 13%, is the way we should read in that?

[Doron Abramovitch:]

Yes, it’s a combination of mainly actual deferred revenues, which you do see in the balance sheet. And on top of that the unrecognized invoices, which is what we call the pipeline, so yes.

[Mike Kerlan:]

And then just the last one, you spoke a lot about search part of business. But the enterprise just looks like a little bit soft in Q3 as well. Can you maybe just talk about the trends you’re seeing in the enterprise?

[Roy Zisapel:]

Enterprise was definitely stronger than the service provider. I think the main impact you’re seeing there is a deferred contracts that we have versus more regular trends. For the full year, still enterprise is up while service year-to-date, enterprise is up while carriers and services providers is down.

[Operator:]

Next question is from the line of Ittai Kidron, Oppenheimer. Please go ahead.

[Ittai Kidron:]

Doron, can you comment on the bookings number? Do you have a lot of services related bookings that are more than 12 months? Is there a way to give us an annualized booking number, instead of an overall bookings number?

[Doron Abramovitch:]

No, we don’t repeat this number.

[Ittai Kidron:]

Is the average service contract of your service is more than a year?

[Doron Abramovitch:]

It’s a bit more than a year. It’s changing. So there a little bit more than a year but I cannot say more than this right now.

[Ittai Kidron:]

Okay. So it is then correct to say that this is not a 12 month booking number, this is -- the 12 month booking number would be lower than this, than the $54 million you mentioned?

[Doron Abramovitch:]

Yes, yes.

[Ittai Kidron:]

Okay. And then your guidance assumptions for the fourth quarter, do you -- does it assume that you close on the other four deals that are still open or what’s the assumption regarding that?

[Doron Abramovitch:]

We don’t have deal-by-deal committed but it’s part of our I would say [high proof] ability deals for the quarter. So we are taking some waiting on the [high proof] ability deals and those deals are part of it.

[Ittai Kidron:]

Okay. Roy, I wanted to go back to the preannouncement where you talked about the six deals in North America that got delayed. I mean now that you had a little bit more time to kind of dig into this, is there a common scene to this delay in that or they are related to a specific product or specific sales team? I am just trying to get again a better understanding on what was the real reason behind this? Because it doesn’t seem like there’s a market issue out here. So I was just wondering how come six all at the same time just delay?

[Roy Zisapel:]

So from what we see it’s not one sales team but it’s mainly around one segment the U.S. service provider and it’s also cross security in ADC but given our business in the U.S. is more focused on security obviously more around security deals. And I am not sure I can have more information. Two already closed relatively quickly. I would say it was more of a technical maybe delay and we could have probably executed better. Some are more limited or more linked to budget allocation and CapEx investments in that segment. I think we have a couple of items. If you want to ask me what do I see that is not related to us? Internally it may be the capital allocation to this project in that specific segment. But again I think we can and we should execute better and as I said we think Q4 booking wise for us is going to be a very stronger.

[Ittai Kidron:]

Have you made any personal changes to the service provider North America team to make sure this doesn’t happen again, at least from your end?

[Roy Zisapel:]

I don’t think that it’s about the personal team. This team including the whole North American team does [indiscernible] dollar sales every year. So I think our execution level there is very, very good. While we are not happy, we are all confident in our execution and this team continues to win for us many new large service providers and carriers in the U.S. and we believe that they will carry us forward as well.

[Ittai Kidron:]

Okay. And then lastly, have you already resolved the leadership issues in Asia, have you found the hires that you needed to fill in the gaps there?

[Roy Zisapel:]

We are in the process adding certain abilities and I think one is already in place working and I believe there will be a couple of more additions.

[Ittai Kidron:]

Very good, good luck guys.

[Roy Zisapel:]

Thank you.

[Operator:]

And next question is from Joseph Wolf, Barclays. Please go ahead.

[Joseph Wolf:]

Thank you. One quick question on the share buyback. I am just wondering given what you did in the third quarter, can we expect that, increase in that share buyback start to the fourth quarter?

[Doron Abramovitch:]

Hi, Joseph, Doron. Basically we purchased 25 million out of the 40, so as mentioned we will now continue with the plan, with the remaining $50 million. And after this we will wait and see what the Board will decide. But we are on track with the plan of the Board.

[Joseph Wolf:]

And then I think you’ve touched on this in a couple of ways. But I am hoping to get a little bit more clarity. As we think about the model going forward, if it’s not in your cost of business and if you take it by supplies, because you gave guidance for the third quarter and then all of sudden your bookings and the timing that you’re spending in deferred revenues is shifting. And I am wondering if I can get a little bit more inside into how that change happened? And also it was as to for as we think about this pipeline number that you’ve given us. How we should be looking at that loans here to revenues or for six months, four quarters, eight quarters as we think about modeling the Company going forward?

[Roy Zisapel:]

So regarding what we’re seeing, especially in security deals, we are seeing a trend that the customers are asking for the cloud components and they’re asking for a fully managed model. Specially, when they’re starting to speak about cloud offerings or that cloud offering is something the customer is interested, they are looking for an OpEx model obviously. They’re not looking for a CapEx model in line with how people consume a cloud. And what we are seeing is more and more deals, where cloud is a component of that deal. In addition, we’ve launched several new product subscriptions, whether it’s the Alteon NG product subscription around Web application file or vast UNAPN, as well as some of our security subscriptions. We are seeing customers committing to deal the product subscriptions, which one might say are substitute to product sales. We believe for the long term, this is a much better trend for us and a much more profitable business for us to do. Yet it has some impact on the short-term. So, I think once we will finish Q4, as this trend, as we said, is new to us and it’s not in line with our previous metrics of service sales and product sales. Once we finish Q4 I think we’ll be in a much better position to give revenue guidance and deferred business growth for the coming year. At this point, we are very-very focused on make sure that our booking numbers are coming where they should, cash flow from operations come where it should. And we feel confident about that.

[Joseph Wolf:]

Just as a quick follow on, you mentioned security. Is there a trend in there just update you see that’s accelerating as well, or is that not happening in some time, if that’s not part of the story?

[Roy Zisapel:]

We didn’t see that.

[Joseph Wolf:]

We did not see that?

[Roy Zisapel:]

No.

[Joseph Wolf:]

Okay, all right. Thank you.

[Operator:]

Next question is from the line of Mark Kelleher, D.A. Davidson. Please go ahead.

[Mark Kelleher:]

Thanks. Most of my questions have been asked and answered. I was just wondering if you might break out security as a part of your revenue, how important is that to you? And if you’re prepared to do it now, would you do it down the road a bit?

[Roy Zisapel:]

I think, given the trend in the business, we are thinking on actually starting to break the cloud and product subscription, which would probably give better visibility also to revenue and our progress in that metric. So we will probably have more visibility and granularity around it actually I think in the coming call.

[Mark Kelleher:]

Okay, thanks.

[Operator:]

Our next question is from the line of Rohit Chopra, Buckingham. Please go ahead.

[Rohit Chopra:]

I had four questions for you. Roy just want to get a sense on OEM, what checkpoint is that, was that up or down in the quarter? So that’s my first question. Second question, which is on the competitive environment, I just want to get a sense. Did you see any uptick on in competition maybe on the securities side? Because you did mentioned security seems to be the one that was impacted with the SPs. But any detail on change in the competitive environment within ADC or security? My third question is just, I want to come back just only if I was asking. But you mentioned on the first call about execution issues but I didn’t really hear any changes you are making. So I just want to get a sense of what you are doing to make any corrections on the execution issues which you mentioned? And the last question was -- I just want to come back to your prepared remarks, you talked about average deal sizes going on because of the subscription type deal. Is there any way that you could share maybe a year-over-year on average deal sizes or maybe some trends because the first I heard of that and it typically been kind of flattish. So if you can give us any type of metrics on average deal size, that would be great? Thank you.

[Roy Zisapel:]

Yes. So first regarding Check Point, I don’t have the number in front of me but we do expect for the year Check Point revenues continue to grow and they are winning for us every quarter some very good new accounts. Regarding the competitive landscape, we didn’t see a change and we think we are actually winning the key deals in service provider across the world and to the extent we have exposure to the enterprise. I think our competitive win ratio has not changed. And regarding the adjustments we do for the business, we are making some adjustments, we’ve discussed Asia Pacific and we are also putting more resources in certain markets in America, EMEA and APAC where we are seeing more opportunity that we are not covered. If you are asking me whether we are making personal changes to the North America organization? The answer is no. As I said we have very strong confident in that team.

[Rohit Chopra:]

And the last one, just average deal size as you mentioned in your prepared remarks that you are seeing average deal sizes go up because of subscription or changes there. So I just want to get a sense if there is anything you can give us?

[Roy Zisapel:]

We don’t have this information in front of me but just to give you a sense of what we are talking about, roughly the cloud component in a deal, deals that have both, cloud component and on-prem device and the cloud component roughly doubles the deal size from a booking point of view. Generally it can be a year or three year deal but let’s say on average the contribution of the cloud piece and managed service fees will roughly double the on-prem deal size. From a revenue recognition point of view, it obviously creates a deferral of the complete revenue over the period of the contract because it’s becoming a managed service deal. But from a booking perspective, it’s doubling the deal size on the deals that we do have [solid] subscription.

[Rohit Chopra:]

Yes, I understand, now I appreciate that. And can I just ask a follow up on Check Point. Was that up or down sequentially?

[Roy Zisapel:]

I don’t have the numbers in front of me.

[Rohit Chopra:]

Okay, thank you.

[Operator:]

And next question is from line of Catharine Trebnick, Dougherty & Company. Please go ahead.

[Catharine Trebnick:]

Thanks for taking my question. Roy, could you clarify one thing on the subscription versus your hardware platform? If I call up Level 3 or AT&A or [One Stream] or one of these carriers, they would sell me company-ex a service, DDoS services in the range of $4,000 to $6,000. So how are you -- what’s your go-to-market strategy with all your new services and how does that impact currently how the carriers are selling the service? Thank you.

[Roy Zisapel:]

The carriers selling their own service has no of course impact on our revenue stream. The impact comes with their buying additional capacity from us. We are selling our cloud services primarily to enterprises and generally they are not competitive with the carrier offering. They are not competitive because by -- they are really globally nature, they are not linked to a specific area link, they are actually generally covering multiple carriers that are providing connectivity for that customers. And overall the DDoS service offered by the carrier including Layer 7 security, web application firewalling, intrusion security Web application, firewall intrusion and prevention and so on. So, we don’t see that competing with our partners over there. We are selling those cloud service either through our channels, through enterprise customers or through partners. We’ve released over the past few several partnerships declined like for example or other parts or other cloud and hosting provider partners that are actually reselling our solutions to the customer base. So we have multiple ways to market those cloud service, either directly by our own sales force, channels and partners. And as I’ve mentioned, we’re seeing growth in this area.

[Catharine Trebnick:]

Okay, and then the follow up on that is where you’re selling it directly. Is that impacting any of your OpEx the fact that you’d have to have more data centers up and with this sub up globally? Thanks.

[Roy Zisapel:]

Definitely it shows our OpEx, but that’s already the interim model. And we’ve mentioned I think Doron mentioned in prepared remarks, that some of the investments we are making are in service teams. And that’s exactly for operating those cloud services. It’s also of course impacts our CapEx as we’re building those cloud data centers. But again this is already in the model. We already have a global footprint both for the DDOS sales service and for our cloud lock service. So I don’t expect a new CapEx investment or a dramatic increase beyond what we are forecasting right now for continued build out of this footprint.

[Catharine Trebnick:]

That was very good. I appreciate you going through that. Thank you.

[Operator:]

We do have a follow up from the line of Alex Henderson, Needham. Please go ahead.

[Alex Henderson:]

Just hoping if we can go back to the mix on ADCs versus security a little bit, if you look at the enterprise ADC business, are you still seeing growth in that business, or is that business in fact flattened out here and should -- what are you thinking relative to the next three, or four-five, quarters there, can we get that business back on to a growth curve?

[Roy Zisapel:]

I believe the business is growing or should continue to grow in the mid single digit. We didn’t change our view on growth percentage in this market.

[Alex Henderson:]

So the second follow up question relative to that is if the primary driver of the weakness in the quarter was in security, did the security revenues in the quarter decline materially as a percent?

[Roy Zisapel:]

We’re not breaking these, but one can assume that it’s our major business in the U.S. come from security then it’s correct. But it was mentioned, booking also went up beyond revenue. So on revenue, yes. On bookings, it’s much less as we done.

[Operator:]

At this time, we have no further questions in queue.

[Roy Zisapel:]

Thank you everyone for attending, and have a great day.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining while using AT&T executive teleconference. You may now disconnect. Have a good day.